SFR Investor · Virginia Beach, VA · Member since 2010 · 150 posts · 36 votes
After reading a post on hear about "Do you tell your friends you invest in RE", I remember a comment someone made to me concerning RE investing a few years back.
This person found out I purchased a home as a buy and hold for rental income and made the comment, "Thats just too risky". Meanwhile this same person just purchased a new car at 42K.
Granted RE does have its risks, especially if you were caught up purchasing in overvalued markets the past few years. But what has more risk, purchasing a vehicle at 42K costing you $700/month for the next 5 or 6 years or purchasing a rental unit with 42K down netting you $400 month positive cashflow after expenses, plus the possibility of appreciation?
Granted your risks are limited with the car purchase, where the RE purchase has the potential of unlimited risks, but over the long haul I'm betting on the RE investment as a low risk investment.
In investing, "risk" has a specific meaning. Based on that meaning, the car is much less risky.
Risk, associated with an investment, refers to the range of possible returns. A bank CD or treasury is low risk because the return is well known. Short of a complete collapse of the US financial system, you're going to get back your principle and the exact return stated when you buy the investment.
A real estate investment or a stock, OTOH, has a pretty wide range of possible returns. So, this investment is higher risk.
A car has a well defined, albeit negative, return. You buy it. You put gas, oil, spare parts and labor into it, and in 10 years its worth nearly nothing. Pretty much guaranteed. So, negative return, but very low risk.
What is risky to another person is not risky to us. Risk is subjective. It is dependent on personal situations, knowledge, and history.
I agree with you, I would rather find a property to pay for the car. However, I did not always think that way. My change in perspective was due to education.
If a person asks, I'll explain it to them. Otherwise, to them, I am a crazy lunatic and they are the stable one.
And yes, the car is very high risk of loosing value and becoming a money drain. The car has almost no chance of appreciation and will not put money in my pocket. The property has more chances of becoming an asset for me.
The car could also allow the person to deploy their "human capital" to work at a job and produce a lot of income. Everyone's situation, goals, and priorities are a bit different and thus the risks are different.
Buying depreciating assets and making payments on them is generally the definition of a poor investment decision though!
In investing, "risk" has a specific meaning. Based on that meaning, the car is much less risky.
Risk, associated with an investment, refers to the range of possible returns. A bank CD or treasury is low risk because the return is well known. Short of a complete collapse of the US financial system, you're going to get back your principle and the exact return stated when you buy the investment.
A real estate investment or a stock, OTOH, has a pretty wide range of possible returns. So, this investment is higher risk.
A car has a well defined, albeit negative, return. You buy it. You put gas, oil, spare parts and labor into it, and in 10 years its worth nearly nothing. Pretty much guaranteed. So, negative return, but very low risk.
This person found out I purchased a home as a buy and hold for rental income and made the comment, "Thats just too risky". Meanwhile this same person just purchased a new car at 42K.
Apples and oranges. Does this person intend to rent out his new car for a profit or hold onto it and see if it appreciates? If not, his car is an expense and your rental home is an investment.
I have some friends that say the same thing. They'd rather have their money sit in a bank account earning 0.5% than put it into something that will really pay them back. That's fine with me, the less RE investors out there, the less competition I have.
Financial risk is well defined, but there are other risk factors to consider as well. An investor investing without knowledge will add to the overall risk of an investment. Someone knowledgeable in the market and the investment type can lower the overall risk.
For your friend RE may have a large overall risk because he lacks knowledge and adds to the financial risk involved.
The car like Mitch said is not an investment and suits a personal purpose. The car is an expense that will continue to cost money though it may provide some financial benefits.
Risk is defined as the Potential of a descision to have a negative outcome.
Buying a new car has no Risk at all. It's a Guaranteed loss.
Here are some stats. Right off of the car lot.
Year 1 loss 20% 42,000
- 8,400
33,600
2 loss 15% - 5,040
28,560
3 loss 15% -4,284
24,276
4 loss 15% -3,641.40
20,634.60
5 loss 15% -3,095.19
17,539.41
So, 17,539.41/42,000= 68% loss over 5 years.
No risk there! You know going into the transaction what you going to lose.
Guaranteed! It's as close to having psychic powers as anyone could hope for. Buy a 1 year old car and save yourself 20% right off the bat. I doubt RE will drop 68% in the next 5 years. But then again. I'm no Psychic.